Queries

Risk Profiling Is A Necessary Step For Safe Investing

Jorin

I have often read on these pages and online that investment should be made according to risk profile. How should one go about finding their risk profile?

Investments should be made according to your risk profile. Risk profiling is essential to determine proper investment asset allocation. Every individual has a different attitude and behaviour towards risk based on age, loss bearing capacity, family structure, liabilities and, most importantly, the time available to achieve the goal. Various websites and mutual fund companies offer risk-profiling tools or questionnaires. For further analysis and determination of risk profile, you can also approach a financial advisor.

Below are a few examples of risk profiles and what such investors can do for different goals.

Conservative: Investors who are not willing to lose the capital at any cost. If the time to achieve the financial goal is short, such investors can allocate 0-10 per cent in equity and 90 per cent and above in debt instruments.  

Moderate Conservative: The investor is unsure yet willing to take risks for slightly higher returns with moderate exposure in equity. For medium-term goals, if the investor is comfortable with medium risk and medium returns, the allocation can be 10-30 per cent equity and 70-90 per cent debt.

Moderate: Investors who are willing to take a higher risk to get a relatively high return. Such investors may be looking at moderate risk and moderate returns over the medium to long term. The allocation can be 40-60 per cent in equity and 60-40 per cent in debt and related instruments.

Moderately Aggressive: The investor is aware of a higher equity allocation, and investments are for the long term. The equity allocation is 70-90 per cent and 10-30 per cent in debt and related instruments. This kind of allocation has moderately high risk to get higher average returns.

Aggressive: The investor is well aware of the risk in investing 100 per cent in high-risk equity and understands market volatility. The investments are made for a longer tenure. The allocation would be 100 per cent equity, and the risk level would be high.

Hina Shah CFPCM Financial Coach, LUHEM

Lumin Pant

My 74-year-old mother wants to independently invest Rs 10,000 every few months in a product that can be maintained easily. She aims to withdraw some money for personal expenses. Please suggest some options.

Your mother can look at investing a part of Rs 10,000 in fixed deposits (FDs), recurring deposits (RDs) or other debt products and, if she is comfortable with taking some market risk, then the balance can be invested at regular intervals into conservative hybrid mutual funds via balanced advantage funds. Further, if possible, she could follow this approach for the next five-seven years based on her risk appetite. She can withdraw funds needed for expenses in the initial years of investment from her FDs. The regular investments into hybrid funds can grow over some time into a sizeable corpus that beats inflation and is more tax-efficient, which is useful if your mother is in the higher tax bracket. The choice will be based on your mother’s risk appetite.

Suhel Chander CFPCM Handholding Financials

Sangeeth P.

My child is two years old. My bank has suggested that I buy a child plan. But I read on the Internet that child plans are not the best products. What should I do? My aim is to save for my child’s higher education.

There are better options available to invest in for your child’s higher education. Since your child is two years old, you have at least 15 years to accumulate funds for this goal. Equity mutual funds will give inflation-beating returns in the long run.

You can start systematic investment plans (SIPs) in different equity funds. For example, if the course costs Rs 20 lakh now, after 15 years with 7 per cent inflation, the cost will be Rs 55.18 lakh. To accumulate a corpus of about Rs 55 lakh, you will have to start investing Rs 11,000 per month in good diversified schemes for the next 15 years considering 12 per cent average annualised returns.

You also need to review this investment every year. You can use calculators available on various bank, insurance and mutual fund websites, once you know the present cost of higher education.

Child plans are essentially insurance plans that could be traditional endowment (5-7.5 per cent returns range) or unit-linked plans. Insurance and investment should be kept separate.

Hina Shah CFPCM Financial Coach, LUHEM